A major real estate firm says it expects Ottawa’s downtown office occupancy levels to “trend higher” in the last few months of 2024, fuelled by a federal government mandate requiring public servants to commute to their desks more often.
The capital’s return-to-office rate still lags other major Canadian cities, Colliers said in its third-quarter office market report released Tuesday, in which it noted the city’s downtown office vacancy rate jumped more than a full percentage point from the previous quarter.
However, the company predicts downtown office spaces will likely start filling up more often as the year draws to a close, thanks to new rules requiring most federal government employees to be in the office at least three days a week.
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“Ottawa’s return-to-office rate remains notably behind other major Canadian office markets but is showing signs of improvement,” Colliers said.
While Ottawa’s downtown vacancy rate spiked in the third quarter, the picture was somewhat rosier in other parts of the city, the report added.
Colliers said the city’s overall vacancy rate held steady at 11.5 per cent in the third quarter, with just 5,500 square feet of negative net absorption.
“Although leasing activity remained steady, it was not sufficient to counterbalance rising vacancies,” the report said.
The firm said the vacancy rate in the core rose to 11.7 per cent last quarter as tenants moved out of “several large blocks” of space in class-A buildings, triggering negative net absorption of more than 180,000 square feet.
Still, Colliers suggested the outlook wasn’t all bleak for downtown landlords.
The firm said it is seeing a “marked increase in touring activity across all tenant sizes, particularly larger users” in the city centre.
“Model suites and improved/move-in ready spaces remain the focus of leasing activity while base building spaces remain less attractive to tenants, given the high cost of leasehold improvements,” the report said.
Colliers said leasing activity continued to be brisk in the suburbs, where the vacancy rate fell by more than half a percentage point to 11.4 per cent on 177,000 square feet of positive net absorption.
However, the firm tempered its remarks, noting the drop in the suburban vacancy rate was due in large part to more than 230,000 square feet of office space at 1601 Telesat Ct. in Ottawa’s east end being taken off the market by new owner Devcore Group, which says it plans to convert much of the former Telesat headquarters into a residential complex.
CBRE reports bump in vacancy rate
Meanwhile, another major real estate firm also suggested the third quarter was a mix of good and bad news for office landlords in Ottawa.
CBRE, which bases its statistics on lower total inventory totals than Colliers, said Tuesday that Ottawa’s office vacancy rate ticked up in the third quarter as new listings rose and tenants left properties that were previously on the market but still occupied.
The nation’s capital saw net negative absorption of about 124,000 square feet between July and September, CBRE said. The office vacancy rate rose to 12.2 per cent during the quarter, up from 11.8 per cent at the end of June.
While the suburban vacancy rate continued to fall, dropping to 9.9 per cent from 10.1 per cent in the second quarter, CBRE said the downtown vacancy rate jumped a full percentage point to 15 per cent – which is where the firm predicted it would be by the end of 2024.
According to CBRE’s figures, it marked the first increase in Ottawa’s office vacancy rate since the third quarter of last year.
The real estate firm attributed the slowdown in positive leasing activity to a rise in new listings as well as “future-dated vacancies which are now available for immediate occupancy in the downtown core, originating from both public and private occupiers.”
CBRE said there was nearly 177,000 square feet of negative net absorption in the downtown core in the third quarter, offsetting more than 53,000 square feet of positive absorption in the suburbs.
The city’s class-A vacancy rate rose to 11 per cent from 10.8 per cent the previous quarter, driven largely by a major jump in the downtown submarket, where the amount of vacant space in top-tier properties increased 1.2 percentage points to 12.3 per cent.
Average net rent for class-A office space was $19.61 per square foot at the end of June, up from $18.86 the previous quarter.
Net rent in downtown class-A space rose to $23.86 per square foot from $22.97, while average rents in the suburbs fell slightly to $15.54 from $15.69.
New construction continued to be at a virtual standstill, with no new projects underway in the core and just 72,000 square feet of new inventory being added in the suburbs, unchanged from the previous quarter.
The latest reports come just weeks after another marquee Ottawa office building was put up for sale in a move that set off alarm bells among some brokers who worry the capital is losing its lustre for institutional investors.
Manulife Investment Management put its 18-storey highrise at 150 Slater St. on the market in mid-September. The 477,448-square-foot, class-A property has been the headquarters of Export Development Canada, a federal Crown corporation, since it opened 13 years ago.
Institutional investors that have traditionally owned many of the capital’s most sought-after office assets “are not looking at Ottawa anymore as a market to get into,” Alan Doak, a partner at Proveras Commercial Realty, told OBJ last month.
Doak pointed to a lingering perception that the federal government, which owns or leases about half of downtown Ottawa’s office space, as well as non-profit organizations that also constitute a hefty chunk of tenancies, are not as eager to return to the office in a post-pandemic world as private-sector companies that make up a much bigger portion of office renters in other cities.
Veteran broker Darren Fleming, CEO of Ottawa-based Real Strategy Advisors, also said he believes the National Capital Region is no longer the “holy grail” for low-risk commercial real estate investors it once was.
Even with the federal government’s recent three-day-a-week return-to-office mandate, the city still lags behind other major urban areas when it comes to occupying buildings, Fleming said.
Across the country, Canada is on pace for its first year of positive office leasing activity since before the pandemic after six of 10 major markets recorded net positive demand in the third quarter, CBRE said.
Toronto led the way during the quarter, with more than 650,000 square feet of positive net absorption – the amount of space leased compared with inventory that became available. That was split between downtown and suburban buildings, the firm CBRE said.
The strength was offset by softness in Ottawa as well as in Montreal and Vancouver, which all experienced more than 100,000 square feet of negative net absorption and saw overall office vacancy rates rise quarter-over-quarter.
The report said suburban markets continued to show improvement for the fifth straight quarter, with the national suburban vacancy rate falling one-tenth of a percentage point to 17.3 per cent.
Meanwhile, the national downtown vacancy rate rose three-tenths of a percentage point to 19.7 per cent.
Seven Canadian cities recorded declining suburban vacancy in the third quarter, led by London, Toronto and Calgary.
Four markets – Edmonton, Calgary, Waterloo and Winnipeg – had lower downtown vacancy.
CBRE national research managing director Marc Meehan said a gap is emerging between older office buildings, where demand is lagging, and “trophy assets,” which the firm describes as the top tier of space within class A – typically the newest and most state-of-the art properties.
Vacancy rates for trophy assets fell one-fifth of a percentage point in the quarter, led by demand in Calgary and Toronto. Trophy vacancy reached the lowest level in nearly four years, the report said.
“Owners of older offices have been hard-pressed to find tenants, but the uptick in office demand for quality space is a rising tide that could have broader benefits,” Meehan said in a news release.
“With availability in trophy assets beginning to tighten, demand could flow to the next quality tier of buildings, especially those well-located and with in-demand amenities.”
Another key indicator of office market health, sublet space, declined for a fifth consecutive quarter since peaking in mid-2023, having shaved 2.2 million square feet since then.
CBRE said the current 14.8 million square feet of national sublet space is the lowest level seen in nearly two years, equal to three per cent of Canada’s total office space inventory.
– With additional reporting from the Canadian Press
